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Decomposition of durable consumption and equity returns

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  • Yu Ren
  • Qin Wang

Abstract

In this paper, we investigate the risks of cash flow news and discount rate news exposed to durable consumption. When utility is nonseparable in nondurable and durable consumption, the optimal portfolio allocation implies a linear factor model in nondurable and durable consumption growth. Using 30 portfolios sorted by book-to-market, momentum and size, we find that the differences in these betas account for more than 70% of the cross-sectional variation in the risk premia.

Suggested Citation

  • Yu Ren & Qin Wang, 2021. "Decomposition of durable consumption and equity returns," Applied Economics Letters, Taylor & Francis Journals, vol. 28(1), pages 79-84, January.
    • Handle: RePEc:taf:apeclt:v:28:y:2021:i:1:p:79-84
    DOI: 10.1080/13504851.2020.1733469
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